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The business model with an extra shot

You might credit George Clooney with much of Nespresso’s brand appeal. But the money is in the pods. Whilst the coffee machines are sold at minimal prices, it is the addiction – or subscription – to the refills that drives profits.

“Nespresso. What else?” ask George Clooney, as if you were to question his taste in coffee. In 1976, Eric Favre of Switzerland’s largest business, Nestle, invented the Nespresso system. 10 years later, Nestle remembered that it was the coffee that people really wanted, not just a great machine. It licensed out manufacturing of the hardware and created “Le Club”.

Whilst the machines are now made by others, from Alessi to Krups, the coffee is made by Nestle, with drinkers subscribing to pod refills sent directly to their homes. Over the decades, coffee culture came to dominate our towns, and people demanded better at home. Nestle, as Nespresso, was waiting.

Nespresso’s success lies in two factors – its business model, and its market strategy. The low cost machines and premium coffee is an echo of the “shaver and blades” model used so successfully by Gillette, whilst the direct to consumer channel allows the brand to build a deep understanding and relationship with its drinkers.

Nestle targeted two primary markets for growth – USA and China. However it realised it would need different strategies from what had worked in Europe. In the USA, Nespresso sought to differentiate itself by targeting women, with a more sophisticated approach, endorsed by Penelope Cruz. In China, growth is slower, taking time for people to consider the alternative to tea. Slow, but huge potential. But Nestle is playing a long-term game. “Relax, it will happen” as Clooney might say.